The 2019 Loan Charge has been condemned by a House of Lords committee, which claims that ‘disturbing evidence’ shows that HMRC has misused its powers in collecting the retrospective tax.
The report, ‘HMRC Powers: Treating Taxpayers Fairly’, published by the Economic Affairs Committee, concludes that recent powers provided to the taxman “undermine the rule of law and hinders taxpayers’ access to justice.”
What is the Loan Charge?
This measure was introduced via the Finance (No.2) Act 2017 to clamp down on tax avoidance schemes, specifically those which paid users in the form of loans – via employee benefit trusts. In many cases, there was no expectation that these loans would be repaid, resulting in significant tax savings for both client and worker.
Although legislation to tackle such tax avoidance schemes has been in place since the implementation of the Finance Act 2011, the Loan Charge retrospectively applies to all unsettled loans made via such schemes on or after the start of the 1999 tax year!
This element of the Charge has led to particular condemnation, together with the disproportionate way HMRC has acted towards individuals caught by the new rules.
Although undoubtedly many users of tax avoidance schemes will be aware of the risk associated with such arrangements, others were unaware of the implications or forced to join such schemes by third parties – such as hirers (see specific points below).
See Chapter 4 of the report for clauses relating specifically to the Loan Charge.
The balance of power “tipped too far in favour of HMRC”
Lord Forsyth of Drumlean, chairman of the Lords’ Committee, in his opening statement, condemned the new powers HMRC has been granted to tackle tax avoidance, as well as their use of such powers.
Although HMRC clearly has an important role in tackling tax avoidance, Lord Forsyth says since 2012, “HMRC has been granted some broad, disproportionate powers without effective taxpayer safeguards. High penalties, designed to deter some taxpayers from continuing appeals against tax liabilities, are a tax on justice.”
The report also specifically criticised Treasury minister Mel Stride, who refused to attend the committee’s evidence sessions.
Individuals targeted, but not scheme providers
The Committee says that HMRC has aggressively pursued individuals (an easy target), rather the operators of tax avoidance schemes.
“In the absence of publicised actions, HMRC appears to be prioritising recovery of tax revenue over justice by targeting individuals, rather than promoters (who could be considered more culpable), so it can more easily recover liabilities.”
Indiscriminate nature of the Loan Charge
The report clearly states that whilst all tax avoidance is wrong, and all users “must accept some degree of culpability“, the loan charge rules are indiscriminate, and that scheme users joined up for a variety of reasons – not necessarily solely to avoid paying tax.
“In many circumstances, individuals were being directed to use these schemes by their employer, who would have been in a better position to determine the consequences for the employee of taking a loan.”
The report criticises the Loan Charge for its retrospective nature – enabling HMRC to go back almost two decades, undermining the existing time limit framework, and potentially abusing their newly acquired powers.
The Committee recommends “that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been ‘closed'”.
Support for individuals
The Committee received a large amount of evidence which demonstrated the hardship caused by HMRC to individuals.
As a result, it recommends that HMRC “urgently reviews all loan charge cases where the only remaining consideration is the individual’s ability to pay.”
The report also urges HMRC to set up a dedicated helpline well in advance of the ‘go live’ April 2019 date.
How did the Government respond to the report?
Responding to the report, the Government reiterated the importance of individuals’ paying their fair share of tax.
“Parliament has given HMRC powers it needs to tackle businesses and individuals who do not pay their fair share, and it uses them responsibly and subject to appropriate checks and balances.
“On the loan charge, in particular, it is important to bear in mind that disguised remuneration schemes are aggressive tax avoidance structures that allowed some people to avoid the taxes that Parliament requires them to pay.”